The first major initial public offering of 2017 is coming in just a few months — at least if Snapchat parent Snap Inc stays on its tentative schedule. The thought is that the Snapchat IPO will go live in March, at an estimated valuation of $25 billion to $40 billion, and the offering is expected to raise up to $4 billion.
But no S-1 is available, so all those details are just educated guesses. Why no S-1? Because the company does not expect to reach $1 billion in revenue for all of 2017, so the company qualifies for an option that allows it to keep its S-1 hidden until closer to the IPO date.
So why should you pay a valuation of up to $40 billion, or even $25 billion, for a company that’s not expecting more than $1 billion in revenue this year?
Call it the Facebook Effect. If you bought into Facebook Inc (NASDAQ:FB) at its IPO in 2012, at the then-unheard-of price of $35 per share, you’re now sitting on shares worth more than $123 each; 250% returns in less than five years isn’t too shabby.
So now, Grandpa, do you know what Snapchat is? No?
Well, that’s OK. Apparently even Snapchat doesn’t know what Snapchat is.
A Camera Company?
Snapchat describes itself on its home page as a camera company. It’s far more accurate to say it’s a social networking company built around images.
Snapchat was first known for “disappearing” pictures — messages that are designed to be erased automatically after being read. It quickly added a “story” feature, combining pictures into a storyline that could be shared, along with video chat features. By last year, the company was doing 10 billion video views each day and launched a hardware product called Spectacles, a wireless camera built into a pair of glasses.
If some of these things sound familiar, it’s because Facebook, and Alphabet Inc (NASDAQ:GOOGL), have been copying them as fast as they can.
Facebook has Instagram, bought the same year Snapchat was launched for $1 billion, and right before the Facebook IPO. Their Direct service is directly competitive with the original Snapchat. Google now routinely offers users their photos as “stories,” and I got my mother’s funeral packaged for me before I returned home from the event.
So again, why buy Snap?
It’s All About Growth
You buy Snap if you believe its growth story, which is eerily like that of Facebook.
Snap was launched by a freshly minted Stanford graduate, Evan Spiegel, who has ruthlessly maintained control of the company. Its revenue for 2015 is estimated at $59 million, $350 million for 2016, and it could approach that $1 billion number this year, although it’s still losing money, investing ahead of that growth.
Snapchat has enormous credibility with users, who were not amused by Facebook moving to change its terms of service in 2012 so it could re-sell users’ work. (Facebook backed away from the move, but the damage was done and is lasting. Never trust someone over 30, man.)
Snapchat also has demographics on its side. It’s hugely popular, on a global scale, with millennials, especially those born since 1990, despite its initial promise that snaps could not be recovered turning out not to be true.
Snapchat also lets advertisers do things they could not do before, like tie ads to locations, and offer software to customize users’ experience around an advertising surround. Snapchat is even seeking to patent a technology that can identify objects in pictures and deliver ads around them.
What You’re Buying
When it comes to technology companies, I have long believed you’re buying the jockey more than the horse. Spiegel is 26 (five years younger than Mark Zuckerberg), he is proven to be ruthless (he denied his initial developer any rights to the product), and both his parents are lawyers (so if there’s anything wrong in this story, we’ll hear about it).
Most of the comparisons made in this story are to Facebook, but those looking for a bearish case should look at Twitter Inc (NYSE:TWTR), a heavily hyped IPO from 2013 now selling for less than half its IPO price.
All that glitters in the tech world is not gold, and all those who buy a hot IPO are speculators. If you’re one, jump in.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
